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SCOTUS Seeks Fed Input on Excessive Fee Suit


The nation’s highest court has sought the federal government’s input on a case that the law firm of Schlichter Bogard & Denton says is having a “chilling effect” on excessive fee litigation.

Specifically, the U.S. Supreme Court has “invited” the Acting Solicitor General to “file a brief in this case expressing the views of the United States” in a suit brought against Northwestern University and the fiduciaries of its 403(b) plan. It was the second of the 403(b) university excessive fee suits to go to trial—and the second in which the university defendants prevailed, back in May 2018. 

The issue the court has agreed to consider is “Whether allegations that a defined-contribution retirement plan paid or charged its participants fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim against plan fiduciaries for breach of the duty of prudence under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1104(a)(1)(B).”

The original suit, filed against Northwestern University in 2016 by the law firm of Schlichter Bogard & Denton, had argued that Northwestern had “eliminated hundreds of mutual funds provided to Plan participants and selected a tiered structure comprised of a limited core set of 32 investment options,” including five tiers—one a TDF tier, the second five index funds, the third consisting of 26 actively managed mutual funds and insurance separate account, and an SDBA. However, the suit noted that Northwestern continued to contract with two separate recordkeepers (TIAA-CREF and Fidelity) for the retirement plan, and only consolidated the Voluntary Savings Plan to one recordkeeper (TIAA-CREF) in late 2012. The suit also took issue with the alleged inability of the plan fiduciaries to negotiate a better deal based on its status as a “mega” plan, for presenting participants with the “virtually impossible burden” of deciding where to invest their money (because of too many investment choices), and for including active fund choices when passive alternatives were available. 

As noted above, the district court[i] ruled in favor of the plan fiduciary defendants in March 2018, and the appellate court affirmed that decision earlier this year

‘Split’ Decision

The issue that the plaintiffs—represented by the law firm of Schlichter Bogard & Denton—want the Supreme Court to resolve is what they argue is a split in the district courts in the standard to be applied in these cases. Their petition for consideration notes that “the Seventh Circuit dismissed petitioners’ ERISA claims for imprudent retirement plan management, even though the Third and Eighth Circuits have allowed lawsuits with virtually identical allegations to advance, and the Ninth Circuit has also upheld similar claims.” This, they claim is “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather, they claim it is “a legal disagreement about where that hurdle should be set.”

The plaintiffs argue—and claim that “most courts have properly held”—that, at the pleading stage, ERISA plaintiffs are entitled to the plausible inference that excessive fees result from imprudent management.” The plaintiffs argue that “ERISA fee litigation has become an increasingly common mechanism for employees and retirees to obtain compensation for losses caused by imprudent management and to spur plan fiduciaries to improve their practices,” and that “at issue here is whether such lawsuits can continue or whether they will be cut off by insurmountable pleading standards.”

Indeed, the plaintiffs argue not only that these suits “have revolutionized fiduciary practices, spurring operational improvements that have sharply reduced plan expenses for millions of Americans,” but that the decision of the Seventh Circuit “…is already having a chilling effect on such litigation,” referencing several recent cases that have cited the precedent in dismissing other litigation. 

We shall see.

[i]It also happens to be a case in which the district court spoke to the issue of the use of participant data, holding that the sponsor doesn’t have a fiduciary duty to manage the use of participant data by its recordkeeper. However, the appeal didn’t address the participant data issue.